Running out of people’s money: Puerto Rico UPDATED

The commonwealth paid a mere $628,000 toward a $58 million debt bill due Monday to creditors of its Public Finance Corporation. This will hurt the island’s residents, not Wall Street. The debt is mostly owned by ordinary Puerto Ricans through credit unions.

And (emphasis added)

On Monday, Puerto Rico had to make a monthly debt payment of $483 million. Puerto Rico paid all its debt due except the $58 million due to creditors of its Public Finance Corporation. The government is strategically choosing not to pay the PFC debt because the entities that own the debt, credit unions and ordinary Puerto Ricans, have little legal power to fight back in court.

The PFC’s 99% missed instalment [sic] is unlikely to set off an immediate cascade of lawsuits or further defaults. Its paper is technically nothing more than a “moral obligation”, backed only by a flimsy letter of credit from the Government Development Bank (GDB), and is mostly held by pliant local investors like credit unions. Just three days before the PFC stiffed its lenders, the GDB duly made a $170m payment on its own debt. Nonetheless, the PFC’s default sharply accelerates Puerto Rico’s debt crisis: it extinguishes any hope that the island’s creditors might all emerge unscathed, and cuts off whatever access to short-term financing the government might have had left.

It may well have been Mr García Padilla’s intention to provoke a sense of urgency.. . .After the island passed its own version of Chapter Nine last year, federal courts struck it down, on the grounds that municipal bankruptcy falls exclusively under federal jurisdiction. That left the governor with no choice but to beseech America’s Congress to bring his territory under Chapter Nine, a plea that has so far fallen on deaf ears. By letting the weakest link in its payment chain snap, Puerto Rico has made the spectre of a chaotic, piecemeal default—which once seemed remote—immediate. In theory, that could spur Congress into taking swift action.

Even if the ploy of taking-oneself-hostage were to succeed, however, the extension of Chapter Nine to America’s overseas territories would not be a cure-all. That law would not cover the restructuring of Puerto Rico’s $13 billion of “general-obligation” (GO) debt, which is protected by a constitutional pledge that it must be paid before all other obligations,

“The government is strategically choosing not to pay the PFC debt because the entities that own the debt, credit unions and ordinary Puerto Ricans, have little legal power to fight back in court.”

They ran out of their own people’s money, but you can be assured they will continue to spend like crazy because 20% of the workforce is on government jobs, which gives the ruling party a built-in constituency. As I have pointed out before, it’s in the governor’s best interest to keep those happy, even if it means to default on all debt in order to meet payroll.